Prepared by Technical Data

A Division of Thomson Financial Networks

Ask any rand trader their long-term recommendation for the currency and the usual answer would be to sell it. This advice would be given on experience. The rand has headed in one overall direction–down–with the timing of the short positioning paramount. However, the South Africa Reserve Bank has learned some lessons from their own painful experiences and by looking at other emerging market economies, especially some of the Far East “tigers.”

In the post-apartheid period, the currency crisis of February 1996 has become a focal point and a yard stick for the country's economic recovery. From February 14, 1996 to the end of October, the rand depreciated by as much as 23.5% in nominal terms. The 10% appreciation over the following five months was accepted as a partial market correction. The Reserve Bank intervened in the market as a net buyer of foreign exchange to avoid exactly the same factors that led to the February currency crisis. The appreciation of the rand, out of line with South Africa's otherwise weak position in a very competitive world economy, was underscored with the belief that a stronger rand could not be sustained in the long term. From the end of March to the end of July 1997, the rand depreciated again by 3.6% to give a net increase of 6.0% in the external value of the currency in the last year and a half.

The Reserve Bank's approach has been to let the market forces take their course and use short-term intervention to support an orderly adjustment process. Therefore, the exchange rate has been allowed to make its market-determined run while liquidity has been drained from the domestic money market. Interest rates have been guided gradually upward, and the resulting consequences of the adjustment in real economic activity has been accepted as essential to avoid greater disruption later. The private sector has endured the painful adjustments with much understanding.

In 1997, the Reserve Bank's monetary policy clearly shows that it is prepared to let the rand ease in line with inflation, intervening to smooth out any potential volatile situations. This was evident when USD/ZAR spiked to 4.7910 on August 21, pushing the rate back to 4.7200. The cross enjoyed a period of consolidation in the 4.6850-4.7250 range, making the holding of short rand positions expensive, with no prospect of covering the carry costs of currency depreciation in the short term. This forced the covering of these positions, easing the rate lower. The Reserve Bank is suspected of restocking reserves with the excess inflow. However, we expect a rapid return to USD/ZAR 4.7500 over the next six weeks, with a gradual weakening toward 4.8000 by the end of 1997.

September 22, 1997John Webb, Foreign Exchange Analyst

Technical Data

A Division of Thomson Financial Networks

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